Ladies and gentlemen, thank you for standing by, and welcome to the DreamWorks Animation earnings conference call. (Operator Instructions) As a reminder, this call is being recorded for replay and the replay will be available today after 7:00 pm Eastern Time through midnight on Tuesday, August 9. You may access the replay service at any time by dialing 1-800-475-6701 and entering the access code 208016. International participants, dial 320-365-3844 with the access code 208016.

I would now like to turn the conference over to your host, Rich Sullivan.

This call will begin with a brief discussion of the quarterly financials disclosed in today's press release followed by an opportunity for you to ask questions. I'd like to remind everyone that the press release is available on our website at web address, www.dreamworksanimation.com.

Before we begin, we need to remind you that certain statements made on today's call may constitute forward-looking statements. Forward-looking statements can vary materially from actual results and are subject to a number of risks and uncertainties, including those contained in the company's annual and quarterly reports as well as other filings with the SEC. I'd encourage all of you to review the risk factors listed in these documents. The company undertakes no obligation to update any of its forward-looking statement.

And with that, I'd like to now turn the call over to DreamWorks Animations' CEO, Jeffrey Katzenberg.

Jeffrey Katzenberg

Thanks, Rich, and good afternoon everyone. The big event for the company in the second quarter was Kung Fu Panda 2, which was released in the U.S. on May 26. It has grossed to date just over $160 million at the domestic box office. And while it didn't meet all of our expectations in the U.S. market, Kung Fu Panda is a blockbuster and has now exceeded over $600 million at the worldwide box office and is about to become the fourth highest grossing movie of the year on a global basis. And we still have the movie in wide release with Japan and Italy yet to open in August.

Kung Fu Panda had the largest ever opening for an animated movie in 40% of its overseas territory, and we've seen significant growth in a number of new markets including Russia, China and Brazil. In addition to international growth, Kung Fu Panda 2 benefited from 3D, which remains a very profitable investment for DreamWorks. 3D has contributed 60% of our international growth and domestically 45% even without an IMAX release. The 3D version of the movie was more enthusiastically received by our audiences, earning higher exit scores than the 2D version.

So Kung Fu Panda 2 was a creative success, and it will be a very solid profitable film for the company. Just as importantly, we believe Kung Fu Panda will continue to be a valuable franchise for many years to come. We look forward to launching Kung Fu Panda: Legends of Awesomeness this fall with our partners at Nickelodeon and our live Kung Fu Panda: Arena Spectacular next year.

Up next for us is a November release of Puss in Boots, starring Antonio Banderas, Salma Hayek, Zach Galifianakis, Billy Bob Thornton and Amy Sedaris. Also in the fourth quarter, we released Kung Fu Panda 2 into the home video market.

DreamWorks Animation remains well positioned for long-term success with a strong track record of profitable films, valuable IP with worldwide appeal, zero debt, a strong balance sheet and more and more exciting business opportunities to pursue in the feature.

With that, let me turn the call over to Lew who will take you through our quarterly results.

Lew Coleman

Thanks, Jeffrey, and good afternoon everyone. For the second quarter, the company reported total revenue of approximately $218 million, resulting in net income of $34 million or $0.40 per share on a fully diluted basis. Performance in the quarter resulted in year-over-year revenue growth of nearly 40%.

Taking a closer look at primary drivers of revenue for the quarter, Kung Fu Panda contributed revenue of approximately $56 million, primarily from worldwide box office as well as merchandising and licensing programs. Our fall 2010 release, Megamind, contributed revenue of approximately $20 million, primarily from home entertainment. Through the end of the quarter, the title reached an estimated 4.3 million net home entertainment units sold worldwide.

Shrek Forever After and How to Train Your Dragon contributed approximately $35 million and $41 million of revenue to the quarter respectively, primarily from domestic pay TV, the majority of expected international pay TV and home video. At end of the second quarter Shrek Forever After had reached an estimated $8.8 million and How to Train Your Dragon had reached an estimated $8.7 million net home entertainment units sold worldwide.

Our film catalog and other another items contributed approximately $67 million of revenue to the quarter.

Moving to the remainder of the income statement, costs of revenue for the quarter equaled $141 million, resulting in approximately $77 million in a gross profit. Selling, general and administrative expenses for the quarter totaled $30 million, including approximately $8 million of stock-based compensation expense.

Turning to taxes, the company recorded tax expense for the second quarter of approximately $15 million. Our combined effective tax rate, which is our actual tax rate coupled with the effect of our tax sharing agreement with a former stockholder, was approximately 31% for the quarter. We currently expect our full year combined effective tax rate to be approximately 30%.

Moving on to the balance sheet, the company ended the second quarter with a cash balance of approximately $113 million. Diluted share count for the quarter was approximately 85 million, and our remaining share repurchase authorization is $125 million.

Looking ahead, in the third quarter, we expect the company's financial results to be driven primarily by the continued international box office performance of Kung Fu Panda 2. Although majority of international box office is recorded in second quarter, the film continues to play into the third quarter with Japan and Italy yet to open overseas. Additionally, we expect to earn domestic pay TV revenues from Megamind in the third quarter.

As Jeffrey mentioned, the next two big events for the company will take place in the fourth quarter, the theatrical release of Puss in Boots on November 4 and the release of Kung Fu Panda 2 into the home entertainment market.

With that, we would be happy to take your questions.

Jeffrey Katzenberg

Just a small correction there, Lew, 85 million shares outstanding, not dollars, just to keep our record straight.

Question-and-Answer Session

Operator

Our first question comes from the line of Barton Crockett with Lazard Capital Markets.

Barton Crockett - Lazard CapitalMarkets

I was wondering if it's possible for you to address some of the news reports about talks with Netflix for some type of pay-TV window distribution deal and a possible early exit of HBO. I understand you may not be able to address the particulars of this report, but if you could just comment in general about your view of the desirability of exploring maybe an early exit of an HBO deal for some other type of distribution arrangement, that would be helpful.

Jeffrey Katzenberg

I think we're going to take a pass in front on this one today. Lots of gossips and rumors and things going on out there right now, and I would just prefer us to take a no comment on this today. And when and if there is something to share with everybody, we'll get on it with you, but on this call today, we don't have anything to report.

Barton Crockett - Lazard CapitalMarkets

Could you address your current view of the state of 3D box office shares? So many releases kind of dipping, what do you think of the state right now?

Jeffrey Katzenberg

Well, I think it's in flux, and I think that we're seeing a different shape and form of it in different places in the world today. So first, take the best and brightest news, which is the international marketplace couldn't be stronger. And it's pretty much uniform around the world. Outside of North America, the performance of 3D continues to be very, very strong and across many different films, and we see continued interest in it, appeal for it. And growth over these next 12 to 24 months, there is still a pretty decent opportunity for it to expand meaningfully internationally.

Domestically, there has been much, much more backlash against the quality of 3D which had some impact on it. I think that there is maybe extremes on both sides, too much extreme on the optimistic side of it going into this here, and probably somewhat blame for some of that; and I think now too much pessimistic perspective on it in terms of where it exists today.

For us to have 45% of our box office share on Kung Fu Panda 2 without IMAX, if you put IMAX into that equation, they tended to represent about 7% or 8% for us in the past, and that would have all been 3D. So it would have put us in the 50%, low 51%, 52%, 53% range off of what had been a 61%, 62%, 63% range a year earlier.

Three quarters of the reviews for Kung Fu Panda specifically called out how beautiful the movie was and how spectacular it looked in 3D. And very specifically in our exit research, the movie actually played better, was rated higher by the 3D audience than the 2D version of it. So clearly, there is a qualitative value to delivering high-end movies that are actually creatively offered in 3D. So I think the more filmmakers that offer and show what the potential is, we will earn back the trust of our consumer and there will be a robust marketplace.

The last thing I want to say about it is that even at its level that exists right now today, it is actually one of the best returns on investments of anything that DreamWorks Animation has done. The cost of taking a movie today and actually executing it in 3D has gotten less for us than it was in the past. And when you look at the incremental revenue that's come in from it, it's a very, very strong return on investment for us. So we remain committed to it and see very good value for us going forward.

Operator

The next question would be from David Miller with Caris & Company.

David Miller - Caris & Company

Jeffrey, obviously the international queue is very strong for Kung Fu Panda 2. You just surpassed $600 million, as you just alluded to. You're probably on your way to $620 million, $625 million or so, hopefully more after Japan. What went wrong with the domestic window? This film should have done $220 million to $250 million domestic box. We're stuck at $160 million. What happened in your opinion? Was it a marketing issue? Was it a review issue? It could have been 3D. Just clearly, the 2D crowd didn't show up? What went wrong in your opinion?

Jeffrey Katzenberg

That's a great question, David, and I actually love that I have the opportunity to answer it, because in a way that I have rarely experienced over many years of doing this, I would say by far the biggest thing that we ran into here, calamity that we ran into here, was our release date. And when we looked at the marketplace a year out and even three to four months out, on that release day a R-rated grown-up movie in Hangover II, we actually felt very comfortable that we had what was good counter-programming.

And we had always anticipated that it would be very strong. We thought it would have an $80 million, $90 million opening, which by the way would have been a record for an R-rated movie. And frankly, at that level, we would have anticipated on that opening weekend doing probably $20 million more than we did.

As we know, they turned into a phenomenon. And what started out as an adult R-rated comedy, by the time it was released with a general audience film, we saw teenagers and kids and even young kids wanting to be part of that moment and whatever came about for that movie, and it opened to $140 million. That $60 million of unanticipated growth that they took out of the marketplace we think cost us $20 million.

And if you look at the multiple that we paid played at and took that to $20 million, we would have ended up exactly where you just suggested. Honestly, it's exactly where we thought the movie was going to.

If you look at the things that are measures that you can take out there, the critical acclaim for the movie with actually super-high for a sequel, one of the highest ever, we were 83 on Rotten Tomatoes, which as they say in the world of sequels, it's actually one of the best reviewed movies of the year.

So I have to say I think we actually unfortunately ran into a completely unanticipated tidal wave. And the interesting thing is, is nowhere else in the world did this happen to us. There is only one place in the world that we opened against Hangover. It was here, and the results were what they were. Everywhere else in the world, we either opened against different competition or no competition or lesser competition. And as I said, 40% of the international marketplace, we actually set new record for opening.

David Miller - Caris & Company

This is now the second film in a row that you guys have released where there was significant damage done to the stock price on the Monday after the domestic opening. So we're really blown away by this that the majority of the Street still continues to focus on domestic opening weekends and then modeling ultimate off a domestic opening weekend, when in fact obviously it's how you finish that matters more versus how you begin.

Given that as a backdrop, would you consider either whether it's with Paramount or with the new distributor or what have you, just releasing everything day and date, just release everything globally around the world like a Pirates 4, like a Harry Potter 8, so that no one has to worry anymore about opening weekends and what the whisper number is or whether or not you'd be at the whisper number?

Jeffrey Katzenberg

So the answer to the very specific question, which is would we consider a day and date release for a film, the answer is absolutely not. What we do is we spend a great deal of effort and time working with our distributor to make sure that we release our movies when our audiences are available for us. And in particular, when you have films in the international marketplace, it plays so strongly to a family audience.

To think that you can dictate to that occasion, when they are going to be available, which is the arrogance of saying, well, if it's Christmas here in America, then it's Christmas everywhere else in the world. Well, let me tell you it ain't Christmas in China. As much as we could like to think the world marches to us, it doesn't.

And to disrespect the cultures and the traditions and the holidays and the school holidays and all of those things, which are so important to our release, I think would be incredibly foolish for us.

And so the international release patterns of our movies is not broken, and we've now seen movie after movie after movie here where we've had exceptional performance, and I think we had a terrible, terrible calamity here in the U.S. and its heartbreaking, because there is no recovering from it. In the international marketplace, it's the opposite.

Operator

That is from James Marsh with Piper Jaffray.

James Marsh - Piper Jaffray

I just wanted to circle back on the competitive environment. Based on what you said about Kung Fu Panda, how do you think the release swayed books for Puss in Boots? I know Happy Feet comes out a couple of weeks later and still before thanksgiving. But maybe you could talk a little bit about that release date and then just maybe the broader animated competitive environment. Maybe you could just compare and contrast that to previous competitive threats in the animation space.

Jeffrey Katzenberg

Again, I guess I would first just like to state what William Goldman has said better than anything I will ever say, which is nobody knows nothing. And you can study these things on and on and on and on and certainly we do, we obsess over this and thought we'd actually made all the right decisions in terms of Kung Fu Panda 2 only to find out the unpredictability and the unforeseen.

Now, I have to say this has never happened to us before. This is the first, but it sure does put our antenna up. We've looked at each and every one of our release dates for the next two years, including Puss in Boots. I will say one of our release dates for one of our films will actually probably move because of the very process that we've just been through. And that's something we are working on with our distributor now and will announce it in the next couple of days. But it's a far-out date. It's not in the next 12 months. It's a couple of years out.

And I think we are well positioned on Puss in Boots. But to really address your question about the marketplace, the fact is that there is an ebb and flow of production in the animated field. We've seen a lot of products come into the marketplace this year. There seems to be less of it next year. And this is a cyclical thing. It goes up and it goes down.

And so for sure, when there is much more of it in the marketplace, it tends to make the movies a little less of an event, a little less special, means we have to work even harder to make sure that we're standing head and shoulders above what else is going on out there. We feel Puss in Boots is actually very, very well positioned. It's the really first week coming into what becomes holiday playtime in November. We do have several weeks before we have any direct competition with Happy Feet. But it looks like good playing time for us.

And I have to say our trailer on Puss in Boots is probably one of the best playing trailers we've had on any of our movies. We have now had over 8 million hits on YouTube on the trailer, which is a record for us. I think actually other than Harry Potter, it is a record.

Operator

And the next question comes from Jessica Reif Cohen with Merrill Lynch.

Jessica Reif Cohen - Merrill Lynch

Can you talk to us about how you're thinking about stock buybacks and why you didn't take advantage of the price that you had in the last quarter?

Lew Coleman

Our overall policy has not changed. Our cash balance since have been running a little lower than normal. And so we've been a bit careful about that, and we wanted to keep some options open, particularly as we go through whatever process we go through on distribution. So we've been holding cash a little bit more than we normally do, but our philosophy in terms of returning excess cash to the investors remains unchanged.

Jessica Reif Cohen - Merrill Lynch

And on that topic of distribution, is there any comments at all that you can make regarding, which seems like a little bit of strange negotiation, given your new announcement of animation?

Jeffrey Katzenberg

Well, I think there are a couple of different issues that are going on. So again, I don't want to say what seems to be something that we do on each and every call for five-and-a-half years. So I wouldn't this to be the first one. We didn't actually say this, which is Paramount has done and continues to do an excellent job for us on the distribution of our movies on a worldwide basis, and they remain very, very focused, committed, passionate about these films, particularly the marketing operation there. They are as upset about it when it doesn't work as we are and as focused about making sure that we have success on Puss in Boots as you could ask for.

So the ongoing working relationship with Paramount is excellent. Our current agreement goes on for another year-and-a-half. And what we are not going to do is move prematurely to try and answer a question which does not need to be answered yet, which is what's next.

2012 does present a meaningful strategic opportunity for DreamWorks and specifically for our shareholders, and we want to make sure that we explore that in every way possible, including and specifically and firstly with Paramount.

Now, as I said in an interview a couple of weeks ago, it's two parties get to make this decision. They get to decide whether they want us to stay and we get to decide whether we want to stay. And both parties need to come to terms with that at some point. As the Paramount's announcement about going into the animation business, I think, if anything, it just reaffirms the value and the appeal of animation in the marketplace today. This continues to be most successful and valuable job-oriented movie in the movie business.

Paramount made a high-end CG animated movie, which they released in the second quarter this year, Rango, which was a success for them and had zero impact on us and our relationship with them and the job they did for us on Kung Fu Panda and the job they are doing for us on Puss in Boots. So I don't see this as quite the issue that everybody else is trying to making it. I don't feel that it compromises us or is competitive with us.

Operator

That is from Vasily Karasyov with Susquehanna.

Vasily Karasyov - Susquehanna

Just wanted to follow-up on Barton's question. Jeffery, given the environment with the 3D movies demand and what you call backlash in United States, when you guys look at it internally, what kind of level do you see to mitigate the impact on your revenue and box office potential for your films? Would it be on the topline side or on the cost side?

Jeffrey Katzenberg

Well, I think I answered it, but I'll try again, which is on the cost side of it. Our costs have come down substantially. When we started two years ago, we were looking at a cost of about $15 million per picture for us to deliver a 3D version of our film. Today, it's less than half of that. And the quality of what we're doing has gone up. So we've amortized the tools. We've amortized the capital investments that we had to make here. And we now have I would say probably as much creative expertise under one roof at the studio, and we have nine films in production all being done in 3D, as probably any company in the world.

In terms of what we need to do is we have to just consistently deliver the highest possible quality 3D experience and for our customers, very specifically the one that seek out DreamWorks' animated movies, for them to know that when they come see one of our movies in 3D, we are going to deliver 110% to them. It will be of the highest quality and it will be used in the most creative and compelling way and will be a premium experience.

At the same time, what we are not going to do and have not done is we will continue to our offer movies in a 2D version of the film priced at a 2D level, because there are a lot of families around the country where that extra added financial premium just gets out of reach for them and for their affordability. So we remain sensitive to the fact that we're still on a very, very stressed economy and something that sort of borders on a recession here. And until we find ourselves in a different world, we do want to make sure that we don't deny our customers the ability to see our movies for a fair price.

Operator

That is from Ben Mogil with Stifel Nicolaus.

Ben Mogil - Stifel Nicolaus

So sort of a two-part question. Lew, on the library front, was there anything in there that was sort of one-time or lumpy in nature, because library was a little bit higher than what we've seen in the past? And then looking on the DVD side, it looks like Shrek Forever and How To Train Your Dragon 2 and roughly the same number of DVDs, even though you have obviously got significant difference in box office. Are you seeing consumers being choosier among sequels? Is there any kind of read through that you would sort of look when you look at that DVD level against that level of box office performance?

Lew Coleman

On the library, the library tends to be a bit lumpy, because it tends to react to the big television window. This particular number had a little bit of extra television window and also about 20% of the number is revenue from our new business projects. So you have to sort of take about 20% of that number off to get more run rate coming out of library.

Ben Mogil - Stifel Nicolaus

I would guess it'd kind of roughly around $15 million or so or $12 million. Is that not recurring? Is that sort of the one-time revenue related to and it doesn't reoccur next quarter? Is that a decent way to think of it?

Lew Coleman

No, it turns out that revenue is getting steadier and steadier, and it's coming Shrek, a little bit of Shrek in London, TV. So it's a lot of different areas. And that 20% number is actually probably more steady right now than the rest of the number is.

Ben Mogil - Stifel Nicolaus

I know you don't want to give guidance. So I'm not asking for that. But do you sort of anticipate that we should still continue to look at the library over full year and that you will see kind of lumpiness throughout the year as we go forward?

Lew Coleman

I think it's the best way to look at it, particularly as you see the TV vendors come in. And obviously it is a little bit more sensitive when we have had three movies out in the previous year than when we have (inaudible) previous year. So you have to include all of that into looking at the quality of number.

Ben Mogil - Stifel Nicolaus

Any thoughts on that DVD question?

Jeffrey Katzenberg

Can you repeat that question? I don't think we heard you.

Ben Mogil - Stifel Nicolaus

When you look at the DVD numbers for Shrek Forever and How to Train Your Dragon, they are basically at the same level. And I think Shrek Forever is down like almost $300 million more at box office globally. Are you seeing consumers be picker on DVD around sequels? Was it How to Train Your Dragon had a great (inaudible) and people sort of unfortunately didn't get a chance to seek it in the feeders. Maybe I am reading too much now of this. But is there any kind of read-through when you see a similar DVD number on much different box office?

Jeffrey Katzenberg

I think both things you said are true, which is that what we have seen, and this has been true now for 10 years, sequels tend to trend down. There is less risk in the sequel on the downside, but they do tend to trend down even when they are great. So an original movie like to like at the box office will outperform a sequel. So that's been a rule of thumb for now 15 years.

In terms of the other side of it, what we continue to see is that when there is a movie that is loved rather than liked, we'll see a higher performance of that title. So for sure, Dragon was a loved title. Despicable Me was a loved title. Tangled was a loved title. And so those films that some part of our audience, if not all of it, loved, you will see a higher performance.

Operator

And that's from Richard Greenfield with BTIG.

Richard Greenfield - BTIG

Given, Jeffrey, some of your recent comments about the state of the overall film business, just curious how you're about ultimates on films that have been released over the last several years with the state of the home entertainment market? Two, could you just elaborate the key piece of that library? What were the key drivers in the core film library?

And then just lastly, you talked about the international box office of the Kung Fu Panda, but it does seem like a lot of it this time versus historically was driven by China where you had a very large $90 million-plus of box office. And that's a market where there hasn't been a lot of ancillaries. And so just curious how you think about where your international box office is increasingly occurring? When it occurs in markets like China and Russia, what can you do to help those markets monetize outside of box office?

Jeffrey Katzenberg

Yes, this movie in particular performed exceptionally well throughout, not just China. And what is for sure true is in the developing markets, China, Russia in particular, we are now starting to see right now, in these last couple of months, some very encouraging emerging after-theatrical market start to reveal themselves in this.

And so I think in a very surprisingly fast cycle, we are going to see these newly, and it's hard to call them developing countries anymore or economies because they are enormous, but we are actually starting to see meaningful after-theatrical revenues start to reveal themselves. And in fact, we actually have a couple if irons in the fire in China and expect to actually announce one in the next couple of days or so. And so they are growing in all the ways you would hope and want them to. So we continue to see a big opportunity from them.

In terms of film business overall, as I said, the movie business is a cyclical one and we have great times in which there are wonderful movies and people are excited about film-going and then we get into slow times. I think the first five months of this year were the disappointing five months. There is no secret about that. The movies weren't great.

We've actually seen in the last couple of weeks the movie business pick up pretty substantially. And in fact, if you look at the box office today, we are now less than 5% on a dollar-for-dollar basis in total of year-over-year. And if you look out over the next few weeks that are left in the summer and then particular into the fall, I am still confident that 2011 will outperform 2010 certainly at the gross box office. I don't know whether that will happen on an admissions basis.

So the movie business has its plusses and minuses and its ups and downs, but it's a fundamentally solid business.

Rich Sullivan

Rich, as far as the TV question, as you know, we had three films released in 2010. Two of those films are hitting their pay TV window, which is a year after the domestic release. And then our 2008 titles are getting the majority of their international free window, which happens roughly around the timeframe after the domestic release. So those are two big drivers in those numbers.

Richard Greenfield - BTIG

And those are the things that won't occur in Q3 and Q4 that helped your second quarter?

Rich Sullivan

That is correct.

Operator

Out next question comes from Tony Wible with Janney Montgomery.

Tony Wible - Janney Montgomery

Something to speak to the pay TV, your comments that you made, did you hit the entire worldwide pay TV release this quarter? Was it only domestic? And if it was worldwide, is that going to be a common practice to release worldwide at the same time?

Jeffrey Katzenberg

Tony, which film are you talking about?

Tony Wible - Janney Montgomery

It looks like Dragon and Shrek you lumped in together with saying worldwide in the press.

Jeffrey Katzenberg

Maybe some worldwide number in there. But for the most part, it's the domestic pay TV window for the 2010 titles.

Tony Wible - Janney Montgomery

I know Madagascar 2 has kind of fallen off for some time, but was there any residual TV revenue that you saw this quarter from Madagascar 2?

Lew Coleman

Yes, Madagascar 2 has been asked for free TV window.

Tony Wible - Janney Montgomery

And how much was that?

Lew Coleman

We don't disclose that specifically.

Jeffrey Katzenberg

Most of these agreements are pretty long-term after-agreements, and we really don't have as much control over the timing making our films available. We think cycle, up and down, are generally a part of our longer-term agreement.

Operator

Our next question comes from the line of Marla Backer with Hudson Square.

Marla Backer - Hudson Square

I have three questions. First of all, Jeffrey, to something you spoke about earlier, about sort of getting blindsided on the domestic release of Kung Fu Panda 2, because Hangover II just seemed like such perfect counter-programming and given how quieter the summer slate and the Thanksgiving slate gets, does that mean to avoid that kind of competition, should that mean moving your release a little bit earlier like pre-holiday, early summer?

Jeffrey Katzenberg

No, I don't think so. We've done awfully great with our release dates, and we have consistently been in that May slot from one week earlier to the week that we're on to one week after. I think we've been there probably 10 years in a row now. And this is the first time that we met a (inaudible). And in terms of our November releases, we've again been either first or third week of November. I think every time there has been another family title, the alternative of whichever one we're in. If we're in the first week, they are in the third, which is where you have Happy Feet, or someone else is in the first and we were in the third and have had great performance for the film.

So we think this hopefully is a one and only in a lifetime experience we're not going to have to visit again. But we will continue to look at these things. And as I said, we will announce and move one of our titles into what we think is a better release slot for us still in primetime, by the way, but different from what we've done in the past because of the very issues we're talking about today.

Marla Backer - Hudson Square

Can you give us a sense of what kind of merchandising program you have wind up? And I don't need specifics, but in terms of directionally how will we compare to Kung Fu Panda and to some of your other bigger merchandising titles?

Jeffrey Katzenberg

It's a modest program. So compared to Kung Fu Panda, it would be more modest than Kung Fu Panda.

Marla Backer - Hudson Square

I am sure that you internally spend a lot of time analyzing those 3D numbers and box office performance. What are your takeaways from the Transformers numbers, the fact that it spiked on the 3D? Do you think that that reflects the marketing of it, that it was a brighter film than the lots of others have been? Or do you think it looks like the quality or combination? And what if any implication does it have for your marketing going forward.

Jeffrey Katzenberg

No, I think it was through to the point there, which is you have Michael Bay who has probably been as adapted using state-of-the-art technology to create stunning movie images. And here is a guy who really knows how to shoot pictures about as beautifully as anybody out there in the world and as excitingly as anybody out there in the world and how to cut and edit those images. And so you give him new tools to play with and he uses them exceptionally, exceptionally well.

And Paramount I think did an excellent job of making that visible to the audience, marketing that well and actually been able to show, whether it was in trailers, in theaters or other ways, that the 3D experience was going to be unique.

Michel is one of the first live action directors after James Cameron to actually use these tools in one of his big event films to author the movie, not to post convert the film. And it showed. The 3D work on the movie was exceptional and people responded to it, and it performed at the box office. So I actually think that was the good news.

Operator

And our next question comes from the line of Tuna Amobi with Standard & Poor's Equity Group.

Tuna Amobi - Standard & Poor's Equity Group

I have a couple of housekeeping questions if you want to call it that. The first one is on film amortization. It seems like it was actually higher than what I may call normalized. So I'm wondering if there is anything going on there. It kind of seemed counter-intuitive to us given the commentary about decline in 3D costs. So I'm wondering if there is any kind of one-off items that might have impacted that. And along those lines, any breakout of the non-theoretical percentage would be helpful?

And the other question was on marketing spend, which I might call somewhat of a positive surprise coming in lower. I know a chunk of the marketing spend probably hit Q1. But is there anything in there that one can take away as to how perhaps you've changed your philosophy about marketing your films. I know that you had recently shifted some of your expense to the internet. And also, you did some promotional tie-in with Zynga. So any color on that and any benefits you might see from such tie-ins whether it's Zynga or some of your other partners would be helpful to kind of gage your marketing philosophy?

Jeffrey Katzenberg

Well, I'll go with number three first and then I'll let Lew address one and two. So the one thing that we have done on the marketing side is there actually has been a greater shift to online, both promotion and advertising. And so that is getting a somewhat bigger percentage of our spend than we have in the past. But beyond that, the gross spend itself is something that we've been fairly consistent about, but it does follow the performance of the film.

So frankly a movie that's performance at a $160 million at the box office is not going to have the same spend as the movie that does $250 million at the box office. So we closely monitor that, not just in the opening of the movie, but the weeks of support that follow a release of the film. And so that's probably where there is some adjustment.

Lew Coleman

Tuna, on the film amortization, on your specific question about 20% of the film amortization line or the expense line is not theatrical film anymore.

Tuna Amobi - Standard & Poor's Equity Group

So why was the spike then in the other 80%?

Lew Coleman

I'm not sure there was a spike. I think it all comes down to revenue mix. Nothing has really changed on how we amortize our film. So I am not sure what timeframe you are comparing it to. But for the most part, the amortization and non-film related costs are the same. We've always done it based upon our expectations of the film's performance over its first cycle.

Tuna Amobi - Standard & Poor's Equity Group

But Richard, I am looking at the gross margin and that kind of nets out what you're talking about. I mean the gross margin obviously was impacted by that. So if the revenues were very high, as clearly they were, just kind of wondering why the margins were depressed. Is there anything else that I'm missing?

Lew Coleman

No, it comes down to revenue mix after walking through on a film-by-film basis, but clearly driven by four films in particular, Kung Fu Panda 2, Megamind, Shrek Forever After and Dragon. Your expectation of performance of those films was lagging amortization rate.

And as far as the P&A side is concerned, I think I understood your question correctly, which was your assumption was that the P&A hit the first quarter. And that's reality. Paramount holds our P&A. And so the films that release, we pay them back as part of a recruitment process.

So the overwhelming majority of not only just the P&A domestically, but internationally as well as most of the box office associated with the film have come through in the second quarter based on the release schedule. So I think that should answer your question.

Tuna Amobi - Standard & Poor's Equity Group

Yes, that's helpful. I don't know if Jeffery talked about the Zynga experiment that I alluded to.

Jeffrey Katzenberg

We've now done this on two movies, and I think it was valuable and successful for us. And I think Zynga also felt that it worked very well for them. So it went into the win-win column, and we would expect to do more with them.

Lew Coleman

Okay. That should do it for our Q&A. If you want to make one point of clarification, I think Tony Wible asked the question on international pay. There is international pay associated with our 2010 films Dragon that's tracking the quarter.

So I did want to clarify that. Apparently I missed on that. But there is revenue in the quarter for that. I want to make sure you are aware of that. But that should conclude our Q&A for today.

And I'd like to remind everyone that a replay of this call will be available shortly on the DreamWorks Animation website, web address again, www.dreamworksanimation.com. If you have any additional questions, please feel free to contact DreamWorks Animation Investor Relations department. Thanks again for participating and have a great evening.

Operator

Ladies and gentlemen, that does conclude your conference for today. Thanks for your participation and for using AT&T Executive Teleconference service. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.